All the Things, All at Once

March 2, 2019

Growing, going, gone?

GDP for the 4th quarter of 2018 increased 2.6%, which was higher than what the market was expecting. Consumer spending grew at 2.8%, which is significantly slower than the 3.5%+ pace we saw earlier this year (remember the horrible retail sales data for December?). Growth in business investment surprised the market to the upside, rising 6.2%, while residential investment declined for the 4th straight quarter (more on this later). And as predicted by the crystal ball of the Philly Fed’s survey last week, the ISM Manufacturing Index came in below expectations and fell 2.4 points in February driven by a decrease in new orders, employment, and production. However, while we continue to see signs building for weakness in manufacturing data, the labor market continues to show strength as the personal income and outlays report showed a decent rise in wages for January.

Moral of the story: Overall, 2018 was a respectable year of growth at 2.9% but the outlook for the beginning of 2019 is a little uncertain given slowing consumer spending and manufacturing activity.

Housing

Home Depot reported earnings this week, coming in below expectations with weak guidance for this year, which was then followed by housing data showing that starts fell 11.2% in December, the lowest level since September 2016. Housing starts data was delayed because of the government shutdown so it’s a little stale and doesn’t include the impact of interest rates (and mortgage rates) coming down slightly. However, the weekly Mortgage Banker’s Association survey hasn’t shown a big pickup in mortgage applications from the slight drop in interest rates. Additionally, home prices only increased 4.7% in December, which is the slowest pace since August 2015.

Moral of the story: Residential investment is part of our GDP and, as highlighted in the FOMC meeting minutes published last week and the GDP report for the 4th quarter, is a point of weakness in our economy right now. The Fed keeping policy rates unchanged should provide some support to the housing market but this could be a drag on economic growth again in 2019.

Powell, et al.

Fed Chairman Jerome Powell testified in front of Congress this week and conveyed a message quite similar to that presented in the FOMC meeting minutes published last week – the economy is healthy but geopolitical headwinds in China and Europe are concerning. Speaking of geopolitical headwinds, Wednesday was a day of all the geopolitical news all happening at the same time as Powell’s testimony. Michael Cohen was testifying against President Trump, who was in Vietnam at the time meeting with North Korean leader Kim Jong Un to discuss denuclearization. Meanwhile, US Trade Representative Robert Lighthizer was testifying in front of the House Ways and Means committee and dampening the market’s optimism on a trade deal with China. Any one of these events had the ability to dominate a full day of the market news cycle but with all of this happening at once, the market reacted with a little bit of ADHD. Going back to Powell’s testimony, the one piece of new information we received was confirmation that the balance sheet run-off will likely be complete sometime around the end of this year.

Moral of the story: There’s little doubt remaining in the market at this point regarding the Fed’s view toward setting monetary policy through the end of the year and Chairman Powell has (finally) figured out how to deliver consistent messaging on policy and not spook the market #winning. The markets do, however, continue to be spooked by the plethora of never-ending geopolitical uncertainties around the world.